Loan Lock

Money: Consolidate and fix your student loan rates today

Quick quiz: Janey and Jim each have $15,000 in student loans, but Janey only pays $147 a month while Jim pays $170. Each will pay off their loan in 10 years. How is that possible?

Answer: Janey took advantage of the insanely low interest rate of 3.37 percent currently being offered on student loans by consolidating and refinancing her student debt. Jim did not, choosing instead to stick with his 6 percent interest rate.

Let’s be clear about the situation. This is not a “good” time to consolidate your student loans and fix their interest rates — it is the “best” time that you will see for many, many years, if ever. Do it and do it now.

Admittedly, in recent years, personal finance writers and financial planners have made it an annual ritual to yell from the roof tops that rates can’t go any lower and college graduates should lock in their interest rates.

But things are different this time. Honestly. Unlike the past four years, the economy is humming along, inflation is looming and Alan Greenspan is beginning to raise interest rates.

However, even as the prices of mortgages and other consumer loans are climbing, rates on government-guaranteed student loans continue to fall, thanks to an odd formula based on the rate of the short-term Treasury bill.

As of July 1, the fixed rate on Stafford loans (the cheapest and most common student loan) slipped to a 39-year low of 3.37 percent for the next 12 months, down from 3.42 percent in the prior year. PLUS loans (Parent Loan for Undergraduate Students) check in at 4.17 percent, down from 4.22 percent.

Those same loans went for 8.19 and 8.99 percent, respectively, four years ago.

But this won’t last. Greenspan is expected to raise rates again in August and, likely, will raise them again later this year or early next year. Eventually, the student loan formula will spit out high rates.

You don’t need a credit check or collateral to consolidate. Anyone who is out of school or attending classes less than half time can qualify (students holding direct federal loans may be able to consolidate while still in school). Some lenders require that you combine at least two loans — they won’t refinance a single loan — or carry a minimum loan amount, say, $10,000.

However, think twice about consolidating Perkins loans, especially if you plan to continue your education. The government subsidizes interest on a Perkins loan while you’re in school, and it may forgive the loan entirely if you pursue certain professions, such as law enforcement. Those benefits don’t transfer to the new loan.

Similarly, grads who are far enough along in repayment to earn a prompt-payment discount — usually 1 percent — could lose that reward. Unfortunately, if you’ve consolidated once, you can’t do it again unless you have at least one federal student loan outside that debt.

If the low rates aren’t enough to make you act now, consider this sobering reality: Congress is thinking of eliminating fixed-rate student loans.

Congress never intended for the consolidation program to turn into a vehicle for refinancing variable-rate student loans at a low fixed rate, even though that’s what has happened as a result of the precipitous drop in interest rates in recent years.

Some lawmakers argue that the existing setup subsidizes graduates who are already in the work force at the expense of current students, and they’d like to change the system so that consolidated loans carry variable rates.

Luckily, Congress moves about as quick as molasses in winter and isn’t likely to do anything until next year.

If only one institution holds your loans, you must give that company first dibs on combining your debt. If the lender declines, you can shop around. Call the number on your statement and ask for an application, or print one from the lender’s Web site. If you don’t know who holds your loans, check the National Student Loan Data System (www.nslds.ed.gov).

Look for special breaks, which are sometimes offered if you pay on time or electronically. For instance, Collegiate Funding Services promises to knock one percentage point off your interest rate if you make 36 consecutive payments promptly; some lenders demand 48 on-time payments before giving a discount.

While you’re working with your lenders, you might also want to consider these other ways to cut your monthly payment:

If you’re truly strapped for cash, you could extend your repayment period as well as reducing your interest rate. That lets you cut your monthly tab by as much as half, although you’ll end up paying more in interest over the life of the loan.

Struggling artists who expect to hit it big a few years hence may select a graduated repayment plan, which starts off with interest-only payments. A variation is the income-sensitive plan, which pegs monthly payments to your income and total debt.